For tax year 2025 through 2028, a new tax law allows individuals who receive FLSA-mandated overtime pay may deduct up to $12,500 single ($25,000 joint) of the qualifying “premium” portion, subject to income phase-outs. Taxpayers should watch for further IRS guidance on how to claim the deduction and which types of overtime pay qualify. As of now:
1. Deduction Amount and Eligibility
- Maximum Deduction:
- $12,500 per year for single filers
- $25,000 per year for married taxpayers filing jointly
- Who Can Claim:
- The deduction is available to both employees and independent contractors who receive qualifying overtime pay.
- Taxpayers must include their Social Security Number on the return and, if married, must file jointly to claim the deduction.
- The deduction is available whether or not the taxpayer itemizes deductions; it can be claimed by those taking the standard deduction as well as itemizers.
2. Definition of Qualified Overtime Compensation
- Qualified Overtime Compensation (QOC):
- Only the “premium” portion of overtime pay required by the federal Fair Labor Standards Act (FLSA) qualifies. This is typically the “half” in “time-and-a-half” pay for hours worked over 40 in a workweek.
- Overtime pay that is not required by the FLSA (such as overtime for exempt employees or overtime paid under state law or employer policy that exceeds FLSA requirements) does not qualify.
- The QOC must be reported on a Form W-2 (for employees) or Form 1099 (for independent contractors), or other specified statement furnished to the individual.
3. Income Phase-Out
- The deduction phases out for taxpayers with modified adjusted gross income (MAGI) over:
- $150,000 for single filers
- $300,000 for joint filers
- Taxpayers with MAGI above these thresholds will see their allowable deduction reduced or eliminated.
4. Reporting Requirements
- Employer/Payor Reporting:
- Employers must report the total amount of QOC paid to employees on Form W-2 wage statements.
- Service recipients must report QOC paid to independent contractors on Form 1099-NEC payee statements.
- For 2025, the IRS has announced that Forms W-2 and 1099 will not be updated to include new QOC reporting fields. Employers and payors should continue using current procedures for reporting and withholding for 2025, with updated forms expected for 2026.
- Transition Relief for 2025:
- The IRS has provided penalty relief for 2025. Employers and payors will not be penalized under sections 6721 or 6722 for failing to separately report QOC on information returns or payee statements, provided the aggregate amount of payments is correctly reported.
- Employers and payors are encouraged, but not required, to provide employees and payees with information about QOC to help them claim the deduction.
5. Additional Considerations
- No Double Benefit:
- The deduction is not available for overtime pay that is not required by the FLSA or is not properly reported.
- Guidance Pending:
- The IRS is expected to issue further guidance clarifying which types of overtime pay qualify and how to claim the deduction on 2025 return
- Disclaimer: The information provided is general in nature and not a substitute for personalized professional advice from a qualified accountant or tax advisor.
Using the website or reading its content does not create a professional relationship (e.g., attorney-client or accountant-client).
The website is not responsible for any loss, damage, or expense arising from the use of the information on the site.
The website disclaims responsibility for the completeness, accuracy, or timeliness of the information, acknowledging that tax laws and interpretations can change.
IRS Circular 230 Notice: Any U.S. federal tax advice on the site is not intended to be used for the purpose of avoiding penalties under the Internal Revenue Code, nor for promoting or recommending any transaction.
Please consult with a qualified professional tailored to their specific circumstances before acting on any information.
The website is not responsible for the content or services offered on linked third-party sites
